Albrecht Ritschl. Deutschlands Krise und Konjunktur 1924-1934: Binnenkonjunktur, Auslandsverschuldung und Reparationsproblem zwischen Dawes-Plan und Transfersperre. Berlin: Akademie Verlag, 2002. 324 S. EUR 59.00 (gebunden), ISBN 978-3-05-003650-2.

Reviewed by Alfred C. Mierzejewski (Department of History, University of North Texas)
Published on H-German (January, 2005)

"I don't want to pay, and therefore I will accept no theory that proves that I must pay."[1] Hjalmar Schacht, the chief of the Reichsbank from 1924 to 1930, uttered these words in 1928. They crystallize the reparations problem: Germany did not want to pay. A new book by Albrecht Ritschl goes a long way toward cutting through the confusion on the reparations issue by showing that Germany could indeed pay, but evaded doing so. Ritschl also makes important points about the nature of the reparations system and highlights for historians the vital need to grasp credit markets in order to understand inter-war economics. This is a book that merits attention from all students of reparations after World War I. While it does not finally resolve the issue, it comes close to doing so.

The literature on reparations has been beset by major problems. Primary among these is the tendency among historians to view an economic issue in moral terms. Historians have been particularly harsh in their criticism of France's search for security, forgetting that Germany attacked France in 1914 and that the preponderance of the heaviest fighting of the war took place in France. Not surprisingly, the French wanted no repetition of this disaster. Secondly, the literature has also overlooked the nature of the German defeat in 1918, and thus underestimated the gravity of France's security concerns and the overall strategic situation. Germany lost the war on the western front, of that there can be no doubt, but it had not suffered a total collapse. Most importantly, Germany won the war in the east. The result, combined with the Reich government's policy of not informing the German people about the actual course of the fighting in the west, was that most Germans did not feel defeated in November 1918. Moreover, as Gerhard Weinberg has pointed out, because the two eastern powers, Russia and Austria-Hungary, had disappeared, Germany's strategic position in central Europe was actually more favorable after the war than it had been in 1914.[2] A third limitation of the literature is the lack of understanding of economics among most students of international relations, and particularly reparations. The result has been the uncritical acceptance of the German claim that the Reich was unable to pay and the failure to grasp the importance of the debt seniority and transfer protection issues.[3]

Ritschl's book overcomes two of these problems. Ritschl is an economist and therefore is equipped to understand international credit markets and the effects of changes in money flows on the German domestic economy. Consequently, he is in a position to evaluate the competing economic theories as tools for understanding reparations. Ritschl also correctly sees that Germany was only partially defeated in 1918. He accurately points out that those who lost the war, Kaiser Wilhelm II, Field Marshall Paul von Hindenburg, General Erich Ludendorff, and the military all abdicated responsibility for their mistakes. This evasion forced the new Weimar Republic to assume the onerous burden of negotiating a peace settlement with the Allies. Consequently, Weimar lacked legitimacy with its own people. That, in turn, undercut its ability to tax them to pay reparations. However, Ritschl only partially overcomes the moral analytical problem.

The initial section of the book is the weakest. Ritschl makes a series of questionable historical assertions. For example, he claims, exposing his Keynesian bias, that a lack of government spending caused the recession of 1926. He also claims that the Nazi economic expansion was made possible by the absence of the credit restrictions associated with reparations that had handcuffed Reich Chancellor Heinrich Brüning. Since the Nazis repudiated Germany's international debts and scoffed at legal strictures, this argument is not convincing. Ritschl also makes the bold assertion that the crisis of the reparations system led Germany into the Depression. This claim, while plausible, requires elaboration.

The most important lapse in this initial section is Ritschl's contention that the negative incentives created by the reparation system prevented the formation of a consensus for economic growth in the Weimar Repubic similar to the one that emerged in the Federal Republic in the 1950s. He bases this claim on the erroneous notion that West Germany paid no reparations. In fact, the Federal Republic paid extensive reparations, indeed at a higher per capita level than the Weimar Republic. West Germany had paid one hundred ten billion DM to Israel and to individual Jews by 1991.[4] Significantly, by 1988, the Federal Republic had also retired the rescheduled Dawes and Young loans.

Finally, Ritschl uses language loosely. One example will suffice. He refers to Schacht as "Economic Dictator" under Hitler. In light of the competition among various government and party agencies for influence over economic policy, this statement can only be considered an exaggeration.

Ritschl states his thesis succinctly: "The connection between reparations and the German business cycle lay in the lack of incentive compatibility of the various reparations regimes. No reparations arrangement before the Young Plan of 1929-30 gave the German side an incentive for a net transfer of revenues. Germany got around the reparations transfer of the Dawes Plan through the planned, massive acceptance of foreign debt. The burdening of the German balance of payments through these foreign debts was the cause of the serious crisis in Germany" (p. 17). Ritschl's insight that the Allies provided the Germans with an incentive and a device for evading reparations is breathtaking and partially correct. The novelty of his assertion turns on the critical word "planned." Later (p. 125), he quotes a Foreign Office (Auswärtiges Amt) document indicating that the German government understood that by accepting foreign and especially American loans, Germany was effectively having the Allies, and particularly American bond holders, bear the German reparations burden. Ritschl, however, offers no evidence that any organ of the German government actively planned and coordinated credit activity. Indeed, since Schacht objected to the massive increase in municipal debt, but was unable to stop it, such an assertion seems implausible. Significantly, Ritschl makes no mention of the Beratungsstelle für Auslandskredite (Advisory Office for Foreign Credits), which might have served as a control center for foreign borrowing. Yet, Ritschl is right about what happened, if not about how. This is because it was unnecessary for the Reich government to coordinate the borrowing activities of the states (Laender), the municipalities (Gemeinde), and private enterprises. Most Germans saw no need to tighten their belts. They did not think that they had started the war and doubted that they had lost it. The majority was certain that they had not been treated fairly at Versailles. Therefore, if investors in the United States wanted to loan them money for projects that could not possibly yield a return, that was just too bad. Operating deeper beneath the surface was another factor. The Germans felt morally and culturally superior to the British, the French, and especially the Americans. As Heinrich August Winkler has reminded us, the German elites considered themselves the political and cultural heirs of the ancient Romans.[5] Consequently, they felt perfectly justified in evading their reparations obligations while building a welfare state.

Ritschl's economic analysis is surer than his introductory remarks. He demonstrates that a Keynesian demand-side approach cannot explain the onset and the severity of the depression in Germany. He then proceeds to show that a neoclassical analysis is also inadequate. In this section he also proves the validity of the theses proposed twenty-five years ago by Knut Borchardt. Ritschl makes clear that excessive wages hampered corporate investment, thereby slowing growth and increasing unemployment. The result was, as Borchardt pointed out and Mark Spoerer has recently documented, a profit squeeze.[6] Furthermore, because of reparations and the associated Dawes and Young loans, credit markets were effectively closed to German business from 1929. In effect, because of the volume of both public and private debt, the change in the priority of reparations in relation to other foreign debts and the removal of transfer protection under the Young Plan, Germany had exhausted its credit worthiness. Consequently, and this is Ritschl's next major insight, Brüning followed an entirely rational course in attempting to deflate the German economy. Only in this way could Germany earn a foreign exchange surplus that would enable it to pay reparations. In passing, Ritschl points out that Brüning was not philosophically opposed to running deficits to stimulate the economy. To prove this observation, he points to Brüning's plans to expand credit to provide jobs late in his term in office. What Ritschl does not note is that Brüning attempted to begin labor creation programs much earlier. For example, he pressed the Deutsche Reichsbahn-Gesellschaft to incur debt that it would use to employ people. Such an approach would weaken the DRG's finances, thereby reducing its attractiveness as a source of reparations, and keep the new debt off the books of the Reich government.[7]

Ritschl then launches into a bold analysis of how the reparations structure influenced both Weimar fiscal policy and the German business cycle. He begins by pointing out, quite perceptively, that the debt burden that faced Germany as a result of the initial reparations plan of 1921, to say nothing of the Dawes and Young plans, was comparable to that borne by the French in 1871. He demonstrates that German national debt as a percentage of gross domestic product in 1921, including reparations, was comparable to the debt burdens faced by both the French and the British. Strikingly, he also shows that after the Napoleonic wars, Britain faced an even higher debt load.

Ritschl then embarks on a discussion of transfer protection. This raises the issues of moral hazard and economic rationality. The Dawes Plan provided for the creation of the office of the Agent General for Reparations, which was occupied by the American corporate lawyer, Seymour Parker Gilbert. The Agent General chaired a transfer committee that determined when German reparations sums, payable by the Germans to the Agent General in gold Reichsmarks, would be converted into the currencies of the beneficiaries (pounds, francs, and so on) and transferred to them. The Germans would only have to concentrate on generating the required Reichsmark surplus. The Allies would handle the rest. This was a great boon to the Reich government and the German economy. Ritschl argues that transfer protection, because it relieved the Germans of the burden of accumulating sufficient foreign exchange to meet their obligations, provided them with an incentive to contract foreign loans. The loans could then be used to pay reparations. Moreover, Germany's effective credit limit was substantially raised. Consequently, the Germans could build their welfare state while paying reparations with other peoples' money. Ritschl contends that this was a completely rational response by the Germans to the incentives provided by transfer protection. He claims that this refutes Steve Schuker's assertion that the Germans abused the system.[8] Ritschl's criticism is valid only if one accepts the German denial of responsibility for the war, their refusal to admit defeat and their estimation of themselves as culturally superior to their creditors. In fact, by fleecing their creditors, the Germans did themselves great harm. The best means of proving one's creditworthiness is to pay one's debts. By evading their responsibilities, the Germans lent credence to J.P. Morgan Jr.'s opinion that the Germans were inferior people.[9]

Schacht, Gilbert, and the chair of the experts committee formed in 1929, Owen Young of General Electric, understood this reality. Consequently, they did not include transfer protection in the new reparations plan. As Ritschl points out, Germany then quickly exhausted its creditworthiness. Brüning then adopted the dual policy of trying to earn an export surplus to accumulate sufficient foreign exchange to service Germany's reduced reparations obligation under the Young Plan and trying to induce the Allies to abandon reparations altogether. In effect, the Weimar Republic, because it lacked legitimacy, could not pay "out of its own hide." Put differently, Weimar could not compel its people to accept a reduced standard of living so as to generate the surpluses necessary to pay reparations.

Ritschl makes another striking argument in this connection. He contends that the purpose that the Americans pursued in the reparations debate was to "modernize" Germany. In contrast, the British and the French both tried to weaken Germany. This argument leads the reader in a fruitful direction, but can be refined. The term "modernization" has been used by German scholars for at least three decades. It is elastic and therefore of little value. Examination of the relevant files of the Deutsche Reichsbahn-Gesellschaft and the Agent General for Reparations shows that, indeed, the Americans along with the British and the French tried to have the Germans adopt a western view of economic behavior. This is especially clear in relation to Gilbert's campaign to have the DRG adopt a more transparent accounting system similar to the one specified by the Interstate Commerce Commission for American railroads.[10] At a superficial level, the Allies tried to convince the Germans to rely on the price mechanism to allocate resources rather than the highly politicized and inherently inefficient commonweal system that they had inherited from their cameralistic predecessors. However, the moral and political implications of this effort were enormous. In effect, the Allies were trying to transform Germany into a western society, forcing it to abandon its Sonderweg.

Ritschl reaches the conclusion that "not reparations themselves have determined Germany's crisis and business cycle, rather the fateful German attempt with ever new maneuvers to refuse, get around and shake off reparations, instead of paying off the reparations burden as evenly and over as long a period as possible" (p. 240). While not entirely compatible with all of Ritschl's analysis, this conclusion strikes at the core of the reparations problem. Germany was in a position to pay. A regular schedule of payments, stretched over a long period, thus reducing the real burden through inflation, offered the Germans an equitable and relatively painless way to fulfill their obligations.

In sum, Albrecht Ritschl's short book on reparations merits careful attention. It clears up many old misunderstandings and should put the reparations debate on a sound basis. It should demolish once and for all the argument that Germany could not pay. It also eliminates the argument that Germany's reparations burden was exceptionally large. Ritschl's analysis also provides clear support for Knut Borchardt's thesis concerning the deleterious effects of high wages, low profits, and lack of room for Brüning to maneuver. In addition, it pinpoints the critical feature of the reparations structure: transfer protection. More generally, it should encourage historians to study credit markets more closely if they hope to understand the inter-war economy. Probably most importantly, Ritschl demonstrates that the decisive factor in reparations was Germany's unwillingness to pay.

Notes

[1]. Hermann Brügelmann, Politische Ökonomie in kritischen Jahren. Die Friedrich List-Gesellschaft e. V. von 1925-1935 (Tübingen: Mohr, 1956), p. 85, cited in Werner Link, Amerikanische Stabilisierungspolitik (Düsseldorf: Droste, 1970), p. 386.

[2]. Gerhard L. Weinberg, A World at Arms (New York: Cambridge University Press, 1994), pp. 7-10.

[3]. The most striking example of this is Bruce Kent's The Spoils of War: The Politics, Economics and Diplomacy of Reparations, 1918-1932 (Oxford: Oxford University Press, 1989).

[4]. Michael Wolffsohn, Eternal Guilt? Forty Years of German Jewish-Israeli Relations, trans. Douglas Bokovoy (New York: Columbia Univeristy Press, 1993), p. 84.

[5]. Heinrich August Winkler, Der lange Weg nach Westen. Deutsche Geschichte, vol. 1 (Munich: C. H. Beck, 2000), pp. 5-13.

[6]. Mark Spoerer, Von Scheingewinnen zum Rüstungsboom (Stuttgart: Franz Steiner Verlag, 1996).

[7]. Alfred C. Mierzejewski, The Most Valuable Asset of the Reich. A History of the German National Railway. Vol. I: 1920-1932 (Chapel Hill: University of North Carolina Press, 1999), pp. 327-334.

[8]. Stephen A. Schuker, American "Reparations" to Germany 1919-1933: Implications for the Third-World Debt Crisis (Princeton: International Fianance Section, Department of Economics, Princeton University, 1988).

[9]. J. P. Morgan Jr. to JPM NY, 22257, Edgall, Scotland, 30 August 1929, p. 1, Thomas W. Lamont Papers, Baker Library, Harvard Business School, 181-1; quoted in Mierzejewski, Most Valuable Asset of the Reich, vol. 1, p. 303.

[10]. Alfred C. Mierzejewski, "Accounting Reform at the German National Railway Company, 1924-1932," Business and Economic History, 23 (Fall 1994): pp. 212-220; Mierzejewski, Most Valuable Asset of the Reich, vol. 1, pp. 238-263.

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Citation: Alfred C. Mierzejewski. Review of Ritschl, Albrecht, Deutschlands Krise und Konjunktur 1924-1934: Binnenkonjunktur, Auslandsverschuldung und Reparationsproblem zwischen Dawes-Plan und Transfersperre. H-German, H-Net Reviews. January, 2005.
URL: http://www.h-net.org/reviews/showrev.php?id=10110

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